Economic Indicators
The Signals That Show Whether Prices Are Stable or Distorted**
Purpose
Explain the indicators that measure inflation, why they matter, and how they shape policy, wages, interest rates, and long-term economic stability.
Core Principle
Inflation Indicators = The Economy’s Price-Pressure Signals**
Inflation data reveals:
how fast prices are rising or falling
whether demand exceeds supply
whether credit and money are growing too quickly
how households and businesses adjust behavior
Stable inflation → predictable planning.
Unstable inflation → distorted behavior and economic risk.
Inflation indicators are essential for maintaining stability.
The Three Inflation Indicators
These are the most important measures of price changes in the economy:
1. CPI — Consumer Price Index (The Broad Price Gauge)
CPI measures the average price change across a basket of goods and services.
CPI captures:
food
housing
transportation
healthcare
goods and services
CPI rises when:
demand is strong
supply is constrained
energy or food prices spike
wages rise faster than productivity
CPI is the most commonly cited inflation statistic.
2. PCE — Personal Consumption Expenditures (The Fed’s Preferred Measure)
PCE covers a broader range of spending and adjusts for how consumers change behavior.
PCE better reflects:
substitution (buying cheaper alternatives)
changes in consumption patterns
healthcare spending and insurance costs
The Fed uses core PCE (excluding food and energy) to track underlying inflation trends.
PCE is the more accurate guide for monetary policy.
3. Producer Price Index (PPI) — Upstream Cost Pressure
PPI measures the prices producers pay for raw materials and inputs.
PPI captures:
commodity prices
manufacturing inputs
freight and logistics costs
wholesale price changes
PPI rises before CPI rises.
Falling PPI often signals future disinflation.
PPI reveals inflation at the production level — before it reaches consumers.
How Inflation Behaves
Inflation follows three main drivers:
Demand-Pull Inflation
Too much demand chasing limited supply.Cost-Push Inflation
Rising input costs (energy, wages, materials) passing through to consumers.Expectations-Driven Inflation
People expect higher prices → spend faster → businesses raise prices.
Expectations can become self-fulfilling.
The Inflation Equation
Inflation pressure can be summarized as:
Inflation = (Money + Credit + Demand) – Supply Capacity
Inflation rises when demand or money grows faster than supply.
Inflation falls when supply improves or demand weakens.
What This Explains
Understanding inflation indicators clarifies:
why the Fed raises rates when inflation increases
why high consumer demand pushes up prices
why supply-chain issues cause inflation spikes
why energy and food dominate headline CPI
why wages feed into core inflation
why markets react sharply to monthly inflation data
why inflation is dangerous for savers and bondholders
Why This Comes Third in the Dashboard Section
After learning:
where the economy is heading (growth indicators)
how strong the labor market is (labor indicators)
you must understand:
whether the economy is stable or overheating
whether purchasing power is being eroded
whether policy will tighten or ease
Inflation indicators are the economy’s early-warning system.